Parents can still help build kids' credit
My recent column on how the credit industry is cracking down on credit-challenged moochers who ride the coattails of those with good credit histories sparked questions from some parents.
They wanted to know what they could do to help their children build good credit now that the credit industry has said it will no longer allow authorized users to benefit from being on the primary cardholder's account.
"I just added our college graduate to my Citibank card as an authorized user in order to get him established with a credit history so he could get a credit card of his own," Matt Maberry said in an e-mail. "He was offered numerous cards while in college with no job, but once he graduated and was hired at a good salary, he can't get one to save his life."
The reason: His son, Will, lacks a credit history, his father said.
It's called "piggybacking" – Web sites allowing consumers
with poor credit scores to hitch on to someone else's good credit record.
The consumers with good credit get paid based on the quality of their credit, with the promise that the new "authorized users" won't actually be able to buy anything on their cards or get any of their personal information.
The bottom line is that people with bad credit can pay a fee to get better credit. If they have a history of late payments, they can get the same low interest rate as someone who always pays on time.
The credit industry has caught on to this, and starting in September, Fair Isaac Corp., which created the dominant FICO credit score, will no longer factor authorized-user accounts into its credit scoring formulas.
That means that people like Will Maberry will no longer get any value out of being an authorized user on someone else's credit card.
When used legitimately, an authorized user account can help someone build credit.
Credit card issuers allow customers to add other people to their account as an "authorized user" without running a credit check. The authorized user can then use the credit card and will have the account record appear on his or her credit report. The authorized user has no liability for the payments; the primary account holder does.
For families like the Maberrys, Fair Isaac's decision will make it harder to help their children get their credit history off to a good start.
"I even tried calling Citibank, where my Advantage card is, and offered to cosign for him, but they won't allow any cosigned accounts," Matt Maberry said.
If you can find a credit card issuer that allows you to cosign, that is an option you can pursue. Just remember to explain to your child that this means you're on the hook if he doesn't pay up.
"While being added as an authorized user used to be a great way to build your credit history, it wasn't the only way," according to Credit.com, a credit-information Web site. "Consumers with no credit can still apply for their own retail credit card, gas credit card, secured credit card or subprime credit card as a way to build their credit. This method of establishing credit is a bit more difficult and expensive than being added as an authorized user."
Credit.com and www.lowcards.com have information on credit cards for students.
To reduce the risk of default, student cards typically have a much lower credit limit, which can increase as you build your credit history.
There are also credit cards for those with a limited credit history. If you pay your bills on time and don't overspend, you will build a good credit history.
If your child isn't old enough to manage a credit card, you can still teach him how to build a strong financial track record by opening a bank account in his name.
At Texans Credit Union, that account is called the Texans Futures Account, and it offers both checking and savings for young people ages 16 to 24.
if a young adult applies for a loan in our Futures account, we will do the loan
in their name with their mom or dad signing as co-borrower," said
John Kurtz, vice president of retail lending operations at Texans. "It opens
that credit report on that child to start building that credit."
"The main thing that I preach is that in the financial world out there, your credit report is a direct reflection on you as a person," Mr. Kurtz said. "That seems like it's harsh, because things happen out there that you have no control of [such as a job loss or large medical bills], but in reality that's what it is."
Experts recommend that you don't put overdraft protection on your child's bank account, so he knows that there's no safety net if he overspends.
"If you have overdraft protection, it teaches you to be lazy if you know that's there," Mr. Kurtz said.
Bouncing checks is certain to give your child a bad reputation with financial institutions.
"If you've got a bad history of bouncing checks, we're not
going to open a checking account for you," Mr. Kurtz said.
"Parents, put $500 in there and say, 'This is $500 I want to put in as a cushion. I will monitor that account,"' Mr. Kurtz said.
One important thing to remember: Many young people today don't carry cash, preferring to use debit cards.
They should know that it's important for them to track their withdrawals, or they can easily overdraw their account.
"Debit cards are just so easy to use that people don't keep up with how much they're spending," said Tracey Mills, spokeswoman for the American Bankers Association.
And you can't rely on technology to tell you exactly how much money you have left in your bank account.
"Certain transactions may take days to clear; some clear at lightning speed," Ms. Mills said. "You should have a good idea of how much money is in there."